Your company is doing great, and that has you wondering whether the time is right to make big changes. You might be thinking of investing in a new retail space, or upgrading your computer system, or even creating a multi-tier marketing campaign. Each choice would make a great impact. But before you make any big financial decisions, you need to calculate the return on investment (ROI).
So, what is ROI?
With any investment, you need to determine whether the purchase makes financial sense. ROI is the analysis that compares the gain or loss from an investment relative to its cost.
Why is ROI important?
Measuring ROI is extremely important because it takes the guesswork out of making business decisions. Knowing that you’re getting – or will be getting – your money’s worth is the only way to strengthen your financial success and grow your business.
How to calculate ROI.
There’s a simple format to calculate return on investment that can be applied to practically any situation: ROI = (Net Profit ÷ Cost of Initial Investment) x 100. If the calculation yields a positive number, you gained a return on your investment; if doesn’t, you lost money.
Here’s an example based on one of the ideas I mentioned above:
You own a coffee shop and are considering relocating to a more walkable neighborhood. You’ve done your research and the total cost of relocating will be $225,000, that cost includes rent, permits, construction fees, higher property taxes, furniture, fixtures, equipment, and marketing. After the first year, you estimate your net profit to be $85,000. That means the ROI of your new shop after the first year is ($85,000 ÷ $225,000) x 100 = 38%.
Calculating ROI is definitely easier than analyzing it. That part is always more complicated. There’s a lot to consider. But it’s the best way to make informed financial decisions about your business. If you need help estimating and analyzing ROI for a particular project or purchase, the Miami CFO team of business, financial, and tax professionals can provide hands-on, personalized service.